Wedlake Bell LLP (with Ed Starling & Connor Pierce acting), represented by Faith Julian of Maitland, successfully obtained summary judgment / strike out on behalf of Grant Thornton LLP (led by Amanda Wade & John Hall) against the former director of a company engaged in Missing Trader Intra-Community (“MTIC“) Fraud on the basis that the errant director should not be permitted to re-run arguments at trial which had already been determined before a competent court (the First Tier Tax Tribunal).
Background
Between November 2005 and May 2006, Phoenix Tech Limited (in Liquidation) (the “Company“) engaged in a number of MTIC transactions which aimed to defraud the Revenue of some £4.5 million. HMRC subsequently issued a misdeclaration penalty in the amount of £607,000, which the Company appealed. That appeal was heard over several days at a full hearing before the First Tier Tax Tribunal (the “FTT“). The FTT rejected the appeal, and also found that Mr Nizakat Khan, the Company’s director, had both the means of and actual knowledge that the transaction chains were connected to fraud. Mr Khan’s submission that he was an “innocent dupe” was rejected.
The Company was subsequently wound up on the petition of HMRC in 2017. The Liquidators then brought a claim against Mr Khan for fraudulent trading and breach of fiduciary duty pursuant to ss 213 and 212 Insolvency Act 1986 (the “Act“).
Mr Khan’s defence, when it came, was essentially that while he acknowledged that the transactions were part of fraudulent MTIC transaction chains, he understood that they were legitimate. Despite the FTT decision having found otherwise, Mr Khan maintained that he had no knowledge of the MTIC scheme in which the Company had (apparently unwittingly) engaged, denying both “blind eye” knowledge and that he had tried to conceal the nature of the company’s business from HMRC.
Strike Out Application
The Liquidators – with Amanda Wade and John Hall progressing the case – applied to strike out Mr Khan’s defence on the basis that it essentially raised no new facts or matters which had not already been determined by the FTT. In summary the Liquidators alleged that by virtue of the FTT decision (i) Mr Khan was estopped per rem judicatam from denying that he had knowledge of the Company’s participation in the MTIC fraud; and (ii) Mr Khan’s attempt to defend the claim was an abuse of process because, firstly, the Liquidators should not be put to the cost and delay of proving allegations that have already been proven in the FTT; and, secondly, it would bring the administration of justice into disrepute to allow the defence to be relied upon in responding to allegations that had already been proven.
Decision
ICC Judge Mullen found in favour of the Liquidators and struck out Mr Khan’s defence. The Judge held, following the rulings in Secretary of State for Business, Innovation & Skills v Potiwal [2012] EWHC 3723 (Ch) and Re E-Tel (UK) Limited (in liquidation) [2023] EWHC 1214, that to allow Mr Khan to rely upon a defence which had already been determined “plainly would bring the administration of justice into disrepute“, and that “the public would regard it as absurd that, having litigated the question at significant public expense in the FTT, Mr Khan should be entitled to have a second bite of the cherry“.
Comment
Whilst there are fewer MTIC cases now in progress, Phoenix Tech is the latest in a recent succession of MTIC-related decisions such as Re JD Group Ltd [2022] EWHC 202 and Re E-Tel (UK) Limited (in liquidation) [2023] EWHC 1214 (both of which saw Wedlake Bell act for the successful office holders). However, its technical importance transcends its immediate context in acting as an authority for the principle that findings of fact in competent tribunals can be applied in separate, subsequent proceedings – even, in certain circumstances, where the parties to the different proceedings are separate entities.
Neither the Liquidators nor Mr Khan had been party to the FTT at which the relevant findings were made – however, that did not prohibit the Liquidators from relying on the FTT decision involving a wholly different defendant (albeit one which retained privity). That has important implications for how company proceedings will impact proceedings against errant directors – and may, where appropriate, be applied in other analogous circumstances.
For a detailed analysis of the case prepared by our Insolvency colleagues click here.